INSIGHT: Unconventional times: N America oil output to increase

26 March 2012 18:07[Source: ICIS news]

By Ignacio Sotolongo

HOUSTON (ICIS)--After years of declining oil production, the US is in the midst of an energy and manufacturing renaissance, leaders of the American Fuel & Petrochemical Manufacturers (AFPM) said during the trade association’s annual meeting earlier this month.

“The nation needs to hear that we are energy-rich, not energy-poor,” the association’s president, Charles Drevna, said on 12 March.

An estimated 1,600 people attended the AFPM meeting, which opened this year with a call to develop America’s energy resources, despite an often challenging business and regulatory environment.

A common theme of most of the meeting sessions focused on how rising unconventional resources are transforming the North American market. The same theme carried over to the later World Refining and Fuel Conference. According to Stephen Jones, a senior director at Texas-based consultancy Purvin & Gertz, these unconventional sources have the potential to temper the conventional crude decline.

“We live in unconventional times, and we’re dealing with unconventional resources,” Jones said. “Ultimately, it comes down to how we take advantage of these resources.”

Not surprisingly, the drilling moratorium imposed following the 2010 Macondo disaster in the US Gulf resulted in significant lost production.

“[Before the disaster], we were heading towards 1.4m bbl/day [out of the Gulf],” Jones said. “That all stopped when the disaster happened. Now we have a resurgence in the Gulf , and we’re likely to grow by an additional 250,000 bbl/day over the next few years.”

Oil production in western Canada is expected to exceed 3m bbl/day by 2015, according to Jones. Canada is the number-one supplier of crude oil to the US, with recent figures from the Energy Information Administration (EIA) showing supply at approximately 2.3m bbl/day.

Crude from newly exploited shale and tight oil wells is likely to add considerably to North American crude supply in coming years.

Oil and gas liquids trapped in dense shale rock are released using a combination of horizontal drilling and hydraulic fracturing (fracking), a technology pioneered in the US. The main three US plays are Bakken, (in North Dakota), Eagle Ford (Texas) and Niobrara (Colorado).

Output of shale oil, a high-grade light crude, is forecast to exceed 1m bbl/day by 2015, and should approach 2m bbl/day by 2020.

The question is how to overcome the potential environmental impact and government regulation in order to get the material to the market.

While a huge surplus of natural gas has pressured prices, gas liquids from shale have been achieving a substantial premium, and could be priced much higher if the oil could be transported to the US Gulf coast refining hub.

Imports from Canada and US inland oil production that is not refined in the Midwest are routed to the Cushing, Oklahoma, storage tank hub, which is the delivery point for West Texas Intermediate (WTI) crude futures contracts traded on the New York Mercantile Exchange (NYMEX).

Logistical issues prevent the oil from Cushing being transported to the Gulf coast.

Historically, pipelines have moved foreign crude oil from the Gulf coast to the Midwest in order to satisfy demand. But foreign barrels are priced against North Sea benchmark Brent, which – because of offtake restrictions at Cushing and geopolitical issues – has been trading at a substantial premium to WTI.

Shipments of Bakken crude have been moving by rail on mile-long trains, with over 100 cars, heading for refiners on the US east coast and the Gulf coast.

At least two pipeline projects are in the works to provide relief to the Cushing bottleneck.

The Seaway pipeline from Cushing to Freeport, Texas, is being reversed by North American energy distribution companies Enbridge and Enterprise Products Partners. And Calgary-based energy infrastructure firm TransCanada is waiting for governmental approval to build the Keystone XL pipeline to move Canadian oil and shale oil through Cushing to the Gulf Coast.

At the World Refining and Fuels conference, David Hackett, president of consultancy Stillwater Associates, unveiled a graphic comparing crude oil cost differences in various North American regions, overlaid upon existing (but capacity-limited) major crude oil pipelines.

The graphic (below) is partially based on a Canadian Association of Petroleum Producers (CAPP) map, overlaid with the consultant’s analysis highlighting a “range of efficient pipeline flows” from Alberta’s giant oil-sands fields and the surging crude output from Bakken tight-oil (shale-oil) fields in North Dakota.

“Currently, the US Midwest area is full of Canadian crude, and all the rest of the crude oil volume length is delivered by high-cost paths, including trucks, trains and barges, to the next markets on the [US Gulf] coast,” Hackett said.

“These high-cost logistics result in the large differences between crude oil prices in the region relative to crude prices on the coasts. We illustrate this with a WTI price on 13 March [2012] of $107/bbl [€81/bbl].

“Bakken was discounted by $18 [on the same day] and Western Canadian Select [WCS] by $36 on that day. Crude oils available on the [US Gulf] coast were much higher. Mexican Maya, similar to WCS, was $7 higher than WTI.

“Louisiana Light Sweet [LLS] was priced $21/bbl over WTI, and North Sea Brent was $20 over. Even 13 API [density] San Joaquin Valley Heavy was posted at $10 over WTI. Alaska North Slope [sold to California refiners] was $17 over WTI on 13 March.”

Similarly, refiners in the cost-pinched US northeast were paying a massive $56/bbl premium over WCS and a hefty $38 premium over Bakken crude earlier this month. Bakken crude is relatively well-suited to the US Delaware Valley refineries currently facing extinction, but cannot reach those refiners by pipeline (which is the cheapest and most efficient route when available).

At the same time, the huge price differential might eventually prompt a pipeline flow reversal between a line in eastern Canada connecting to Portland, Maine, enabling Bakken crude to reach a relatively nearby port for onward crude shipping to those Delaware Valley refineries.

In the near term, rail and pipelines will move the oil to refineries. Some companies will also build chemical facilities to take advantage of cheap natural gas supplies for steam cracking. Anglo-Dutch Shell has revealed plans to build a chemical complex near the Marcellus Shale Formation in Pennsylvania. The oil and gas major is expected to turn ethane from natural gas into ethylene, ethylene oxide and polyethylene.